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Are Cigarettes Overtaxed in India?

Autor:   •  March 9, 2015  •  Essay  •  684 Words (3 Pages)  •  642 Views

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In the case study, the author uses two methods to calculate elasticity. In the Arc Elasticity method he is able to estimate that the elasticity seems to be sharply rising in the period 1991 to 1995. The following is the result he has obtained

Period for

Arc Elasticity of Demand


1991-2 to 1992-3

1991-2 to 1993-4

1991-2 to 1994-5

(-) 1.61

(-) 2.15

(-) 6.47

He again uses the Regression model with the data he has for the period 1973 to 1995. He runs the regression for the entire data once and then only for the period 1982 to 1995.

In the given table he has shown that the Price elasticity estimate at 1994-95 levels is (-)2.06

Taking these values at face value it can be concluded that indeed in this period, Cigarette prices are elastic….

Referring back to the taxation policy, presuming that the government is only interested in tax and in maximizing tax, the case clearly points out that there is a general assumption by the Government of India that there is Price In-elasticity in the Cigarette industry and irrespective of the tax component going up, the average consumer would continue to buy Cigarettes. Hence it is assumed that higher taxation means higher revenue for the government.

In contrast, a study has clearly indicated that there is price elasticity in the Cigarette market and the consumer's buying pattern changes. The empirical data clearly indicates that the consumption does respond to price variations as calculated by the author. The most important reason for such elasticity is due to the availability of plethora of substitute products in the Indian tobacco market and Cigarettes constitute just 13 percentage of the overall tobacco Industry and the remaining 87 percentage comes under the unorganized sector reaching whom is very difficult.

Due to higher taxation, the price of the Cigarettes go up and also the revenue for the government in the short run. But sooner than later, the elasticity comes into play. The Cigarette become unaffordable for some more customers and he will shift to substitute products thereby reducing the Cigarette sales and in turn the revenue for the government.

The data regarding the tax rates, general inflation and change in price of raw material is insufficient in the case to decide the quantitative aspects as to what level the taxation can be done so that taxes can be maximized…


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